Growth in automotive and industrial segments mitigates slowdown in smartphone sales
In the previous part of the series, we saw that Texas Instruments (TXN) reported strong guidance for fiscal 2Q16 based on strong demand from the automotive and industrial segments. This has helped the company mitigate the impact of a slowdown in demand from its largest customer, Apple (AAPL). Apple expects iPhone sales to fall 13%–17% YoY (year-over-year) in fiscal 2Q16.
Let’s look now at TXN’s exposure to Apple and how it affects earnings.
Texas Instruments and Apple
Texas Instruments supplies four iPhone components to Apple. According to the above graph, TXN’s revenue was high in fiscal 3Q15 compared to the other quarters. This was when Apple launched its flagship products, the iPhone 6s and 6s Plus, which reported record sales.
However, Apple scaled back iPhone production from December 2015 to June 2016. That caused Texas Instruments’ revenue to fall 2% YoY in fiscal 4Q15 and 5% YoY in fiscal 1Q16. Fiscal 2Q16 revenue guidance is flat on a YoY basis.
In fiscal 1Q16, TXN’s personal electronics segment reported a $150 million decline in demand, which was expected. This decline was offset by an 8% YoY increase in the embedded space.
Other Apple suppliers diversify in adjacent markets
Other Apple suppliers such as Cirrus Logic (CRUS) have reported revenue declines. Skyworks (SWKS) is diversifying into adjacent markets to reduce its reliance on Apple, venturing into embedded and industrial segments.
Qorvo (QRVO), another Apple supplier, has increased its exposure to Chinese (FXI) handset makers. These Chinese companies are witnessing exponential growth as consumers shift from high-end smartphones to mid and low-end models. Qorvo is also expanding in the communication semiconductor market.
Diversification to boost revenue growth
While diversification has mitigated the impact of slowing iPhone sales, it could boost revenue when iPhone sales increase.
According to Taiwan’s Economic Daily News, Apple is producing 72 million–78 million units of its upcoming flagship product, the iPhone 7. It’s scheduled for launch in September 2016. This would significantly boost revenues of iPhone 7 suppliers since they would benefit from growth in iPhone production as well as adjacent markets.
In the next part of the series, we’ll look at the impact of the iPhone 7 on Texas Instruments and other Apple suppliers.